Jodi Pratt, Principal of Pratt & Associates, said Tuesday that putting tools, controls and procedures in place to stop insider fraud are important. She believes it is even more important for managers and executives to create an environment that encourages “good folks to continue to be good folks” and shows “bad folks” that fraudulent activity is unacceptable.
Pratt was presenting to banking professionals at BAI Payments Connect Conference & Expo about the problem of insider fraud and the importance of a strong ethical and anti-fraud culture for identifying and deterring insider fraud. According to Pratt, the most important element in creating an anti-fraud culture is two-way communication between management and staff.
“Even if the company is doing well, the fact that insiders are not hearing from you will mean that your employees will assume the worst and develop rumors and anxieties,” she said. “These things create negative work environments. Negative work environments support rationalization for doing something against your employer to obtain more money.”
She said even though you can’t always tell employees everything that is going on; share as much information as you can. Dispel rumors. Set them on the right track. “Let them know that they will hear information from you about the organization. Particularly in the socio-economic environment we find ourselves in today, you want your employees to know where they stand with you,” said Pratt.
This should be communicated as part of an open door policy. Pratt says the communication can’t be one-sided push because you need to know what the “good” employees see. She says one of the most valuable tools in your arsenal is the “good guy insider.”
“Part of the reason that you want to maintain an open communication and positive feel toward your organization is because you may have insiders who see things,” said Pratt. “If they are not feeling positively toward your organization or toward your management, the tendency is for them is to say to themselves, ‘Well, I may not do what this guy is doing, but I’m not going to tell anybody about it either.’”
Make it easy
Pratt says to let employees know that you prefer for them to alert you to wrongdoing; it’s their obligation. “Let them know that we’re in an industry where security and soundness is critical. If someone is doing something wrong in the organization, it hurts us all. But then you provide an easy mechanism for them to let you know what you need to investigate,” she said.
She said that many organizations create an internal hotline where the tipster’s identity will be protected. Even more effective is the use of a third-party that takes the information and reports back to the organization. According to the ACFE 2010 Report to the Nation, the anonymous tip is the most effective method of reporting and finding insider fraud.
Teach a man to fish
Another important method of improving the fraud environment is training and education. Pratt says it’s impractical to try to educate every employee about every type of scam and fraud. Her suggestion is to begin at the time of employment and let your employees know that the information and technology associated with this field carries a high black market value – “people will potentially approach you to attempt fraudulent transactions or fraudulent activity.”
According to Pratt, this early training is the beginning of the culture of communication. She recommends telling employees to talk with their managers when they suspect that something is not right or feels off. Reinforce this message when an employee moves to a new line of business as there are exposures related to each area or line of business.
Nip it in the bud
Like any fraud, firms want to stop insider fraud before it can happen. Pratt offered three final bits of advice that may have the most potential in that arena. First, she suggests a stringent employment application process including integrity tests. According to Pratt, an effective deterrent for insider fraud is awareness by employees that a condition of employment is periodic and unannounced monitoring, drug testing, rechecking of credit, court and DMV records.
Pratt also suggests a code of conduct that is refreshed annually and signed by the employee. “Say what you mean and mean what you say. Make this code of conduct visible and say, ‘We don’t tolerate fraud. We monitor for fraud and we will pursue people who do not abide by our policies.’”
Finally, Pratt suggests participating in the Early Warning internal fraud database. “Financial institutions can report when an employee is terminated for fraud or for an attempted fraud. Then other FIs, as they get candidates for employees, can access the database to ensure that the individual isn’t already in the database. This is good for the industry; the more FIs that participate the safer it is for everybody.”
Pratt says that the message from an anti-fraud culture is that this organization is highly secure; you don’t want to work here if you are going to commit fraud. “We do not condone any insider activity. We will be looking for you. We will be monitoring you. We will be prosecuting you to the fullest extent of the law. If you plan to work in this organization, you’d better be good.”
She says that probably won’t scare a fraudster, but they will probably look for a softer target. Success!